Microsoft eats another $1B as phone strategy shrinks to enterprise-only

Microsoft's announcement yesterday that it would eat nearly $1 billion and lay off another 1,850 workers, three-quarters of them from its phone division, prompted analysts to call the company's consumer smartphone business dead, deceased, departed.

They agreed that Microsoft's only remaining shot at phones is the enterprise, probably with a "Surface"-branded model that apes the Surface Pro as a design benchmark that struts Windows' capabilities.

"They've discarded consumer," said Patrick Moorhead, principal analyst at Moor Insights & Strategy, in an interview. "They just tossed out the Windows fan. It's now all about business."

Moorhead and others based their opinions on statements made in mid-2015 by CEO Satya Nadella, who spelled out three markets for Microsoft's smartphones after he announced a retrenchment and a massive $7.6 billion write-off for the failed acquisition of Nokia under his predecessor, Steve Ballmer.

Those markets: value-oriented buyers, Windows loyalists and business customers.

Last week, Microsoft abandoned the low-end market when it sold what was left of its feature phone business for $350 million to FIH Mobile Ltd., a subsidiary of Taiwanese contract manufacturer Hon Hai, better known as Foxconn, and to Finnish firm HMD Global. Previously, Microsoft had cast the feature phones as gateways to the more expensive and advanced Windows-powered smartphones.

Microsoft will take a charge of approximately $750 million against its phone business earnings in its Q2 financials at the end of June, and set aside another $200 million to cover severance for the laid-off workers. The addition of another write-down brings the bill for the Nokia disaster, initiated by Ballmer in September 2013 and finalized in April 2014, to nearly $11 billion in charges, restructuring fees and severance payments.

The total was more than that, said Jack Gold, principal analyst at J. Gold Associates. "It goes back much further than Nokia," Gold said. "They were investing $1-to-$2 billion a year in Windows Phone for years. So the overall amount is much higher. But it's not going to hurt Microsoft. It's not going broke."

Still, Microsoft's once-professed smartphone strategy is in tatters.

Microsoft didn't say that, of course. But it did acknowledge that the accumulated write-downs and layoffs put it in a tough spot. "Our phone success has been limited to companies valuing our commitment to security, manageability, and Continuum, and with consumers who value the same," wrote Terry Myerson, the executive who runs Microsoft's combined devices and operating systems division.

"We need to be more focused in our phone hardware efforts," Myerson added, not the first time the Redmond, Wash. company's leaders have said that.

Nadella echoed Myerson. "We are focusing our phone efforts where we have differentiation -- with enterprises that value security, manageability and our Continuum capability, and consumers who value the same," Nadella said in a Wednesday statement.

Just ignore the talk of consumer, analysts said: The only remaining target for Microsoft, assuming it stays in the manufacturing business, is enterprise.

Carolina Milanesi, an analyst with Creative Strategies, envisioned a Surface-branded smartphone playing the same role as the Surface Pro, and aimed at corporate buyers who wanted to stick with a Windows-only environment. OEMs, like Lenovo and HP, that pitch deals to enterprises may want to build and sell Windows 10 Mobile devices for that reason, Milanesi said.

"There are ways of thinking about mobility that don't have a phone part to them," Milanesi added, ticking off other angles, including tablets in general, small-sized tablets specifically -- a Surface Mini, essentially -- with pen support via Windows Ink, and hardware, whether in phone, tablet or Lilliputian-sized PC format, that relies on Continuum, the Windows 10 feature that lets small devices serve as the horsepower behind a desktop setup. "There are different ways to appeal to users than phones," she argued.

Microsoft's strategy, what with the flop of its own smartphone business, has pivoted to stress apps, services and subscriptions for the two viable ecosystems, Google's Android and Apple's iOS.

And that's the smart card to continue playing.

"Where they're still in it, and should play, is services that empower the Android and iOS ecosystems," said Gold. "It should not have ever been in the cut-throat hardware business." Microsoft doesn't have to own the hardware to make money in mobile, Gold stressed, citing Office 365 as an example.

Moorhead, on the other hand, leaned more toward Milanesi's position, asserting that devices running Windows 10 Mobile could be profitable for OEMs. "I absolutely believe that there are unmet needs in the commercial smartphone market," Moorhead said. "There are ODMs (original device manufacturers) who are interested in incremental sales in the business market, where you can expect higher margins. HP and Alcatel make the most sense there."

Alcatel, now owned by Chinese technology firm TCL Corp., was formerly a part of U.S.-based Lucent.

Microsoft promised to continue support for existing Windows smartphones, including its own devices and those from partners. Last week, it pledged to keep at it on Windows 10 Mobile.

But there was little retrospection on the part of Microsoft, and virtually no post mortem explanation for burning through billions. Myerson was the exception. "When I look back on our journey in mobility, we've done hard work and had great ideas, but have not always had the alignment needed across the company to make an impact," he wrote in an all-hands email published by Recode yesterday.

"This is such an utterly clueless explanation of why Windows Phone failed that it's kind of stunning," countered Ben Thompson, an independent analyst who operates Stratechery.com, in a Wednesday analysis (subscription required). "Myerson still has the Ballmer-esque presumption that Microsoft controlled its own destiny and could have leveraged its assets (like Office) to win the smartphone market. Myerson still wants to blame (apparently) the Office division."

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